Energy and Natural Resources Market Radar (April 1. 2013)
Strengths
- Oil production in Texas’ Eagle Ford shale formation climbed 50 percent in January versus a year earlier. Growing production out of Eagle Ford is helping fuel a renaissance in Texas crude. The state produced 2.22 million barrels a day in December, the highest monthly level since June 1986, according to the U.S. Energy Department’s Energy Information Administration.
- Front-month natural gas futures settled at $4.07 mmbtu, their highest level in 18 months, amid expectations that elevated demand could wipe out the longstanding glut in natural-gas inventories. The upswing in demand caused by a blast of unseasonably cold weather has led to several weeks of unusually large withdrawals from inventories. That has caused inventory levels, which have been well above normal for more than a year, to approach seasonal norms again.
- Platinum rallied after Russian Natural Resources Minister Sergey Donskoy raised the possibility of South Africa and Russia acting together in the platinum group metals markets, where they have a combined 80 percent of mine output. Speaking to Bloomberg at the BRICS summit in Durban, he said "our goal is to coordinate our actions accordingly to expand the markets for realization of these metals.” No details were given on how such coordination would work given the importance of private mining companies in PGM production, or the reaction of major consumers.
Weaknesses
- In an analysis report on the iron ore market, the National Development and Reform Commission said a supply glut in the iron ore market has been formed, as demands in China and other economies cannot digest the increasing supply at home and abroad. As China's strong demand for steel begins to ease after the fade-out of the massive stimulus plan during the international financial crisis, combined with slower consumption in developed economies and a limited boost from emerging markets, momentum on the demand side is giving way to supplies. “Given the trend, an oversupply situation is inevitable,” the report said.
- Copper eased down 1.4 percent this week to close just above $3.40 per pound as warehouse inventories of the metal rise to multi-year highs.
Opportunities
- According to news on plastemart.com, the U.S. has overtaken the Middle East as the region with the cheapest petrochemicals feedstock, for the first time since the Gulf’s industry was established. The boom in shale gas production has created a wealth of cheap gas feedstock in North America, driving a new generation of petrochemicals expansion in the U.S. “The cash cost per ton of ethylene in the U.S. in Q4-2012 was lower than the cash cost in Saudi Arabia,” said Nexant vice president Graham Hoar, speaking at the MEED Middle East Petrochemicals 2013 conference. “It is a dramatic change in economics in the U.S.”
Threats
- The U.S. Department of Interior is cutting federal mineral payments to 35 states by about $110 million this fiscal year as part of the automatic federal spending cuts that started this month. Wyoming Governor Matt Mead announced this week that his state faces the biggest cut; at least $53 million over the next five months. Wyoming is the nation’s leading coal-producing state and last year received nearly $1 billion in federal mineral payments. Texas is losing only $324,742. The federal government paid a total of $2.1 billion last year to the states, representing their share of revenue from energy and mineral production that occurred on federal land within the states, as well as offshore.
- WSJ’s “Heard on the Street” column speculates that oil prices could head lower in the medium term as demand trends move lower due to fuel-efficient vehicles and environmental concerns. The article deduces that lower demand will lead to lower prices.
- Researchers at the University of Oklahoma, Columbia University and the U.S. Geological Survey published a report linking Oklahoma’s largest recorded earthquake to waste water disposal from oil production. Oklahoma’s geological office said this week that the 2011 earthquake was likely, “the result of natural causes.” The waste water blamed for the earthquake was from conventional wells in the Hunton formation.
- Stockpiles of steel products at large Chinese producers surged to a record, near 15 million tons as of mid-March, according to industry data on Wednesday; reflecting tepid demand that has forced mills to cut output.
